Forex trading is one of the best investment options where you can invest money to gain money. It is such a place where you cannot earn a single penny if you have zero account balance. So if you are thinking about becoming a Forex trader and if you ask for tips from any successful trader then they will suggest you follow pure money management rules. Because in Forex trading you are directly risking your money in the hope of gaining potential profit. This is what makes Forex trading so risky because for making any mistakes you will lose some money.
Losing money is a natural thing in this market but if you follow a strict money management rule then no matter how much trade you lose, you will be in profit. In this article, we are going to talk about some money management tips so that a trader can make his own money management rules.
Understand your risk per trade
When you are going to invest in Forex trading then the First thing you must need to consider a certain amount of money according to your account balance that you are ready to lose. According to that, you just need to fix your risk that you are going to take in a single trade. We will suggest you consider not more than 2% risk for each trade and less than that if you are an amateur trader. A trader must need to fix his position size according to his overall risk and if he needs to open multiple positions then his lot size needs to be divided according to that.
Let’s say a trader has a trading balance of $10,000 and he found a potential signal and he wants to open that position with a 50 pips stop loss. So as we said no to take more than 2% of the risk which means here you 2% will be $200. So need to open that position with not more than 0.4 lots with your $50 stop loss and by doing that you can reduce your risk per trade. But to execute the steps at the right price, chose to trade with high-end brokers like Saxo. Stop relying on the low-grade broker as it will make things hard.
Always use stop loss
The forex market is the most volatile market and the movements of this market are related to multiple variables. As a result, when you are a trader it is quite impossible to consider every possible variable. This is why using stop loss helps you not to lose your whole account balance in a single trade. If any announcement comes market might move more than 100 pips with just a blink of an eye. So if you have a position opened against that announcement you might lose a huge amount of capital before you close the trade manually. Using stop-loss helps you to stay away from this type of scenario and sometimes the market becomes so volatile that your stop loss level fails to close at the required point.
Use a valid risk-reward ratio
Using a valid take profit level is as important as using a stop loss. When you open trade then you must need to fix a certain amount of profit that you are going to make with that trade. So you just need to set both stop loss and take profit level as soon as you open a trade. But you have considered that your trade needs breathing time before it gives you a profitable outcome. So before you start trading you just need to fix a risk-reward ratio and it must have to be a positive one. The risk-reward ratio is the ratio between the profit you want to make and the risk that you are willing to take for each trade. So when you are using a 1:1 risk-reward ratio then it means that you are willing to put the same amount of risk that you are trying to gain. We will suggest you use a risk-reward ratio of 2:1 or 3:1 because in this way you might lose 55% of your trade and you can still be in profit.
These were the 3 key money management rules that you must need to follow if you are trying to be a profitable Forex trader.